This year has been a big one for hedge funds as they suffer at the hands of an army of retail investors. Some made significant gains trading meme stocks, while many took a downturn. In case of Blackberry (TSX: BB)(NYSE: BB), the sharp increase has sustained so far. The tide could turn at any time and stocks could fall sharply, as they did in January.
Remember that meme stocks do not operate on the same principles as normal stocks. This new wave of social trading created by zero commission online brokers has given millennials the power to trade at their fingertips. The best and most effective way to reach this segment of the population is through memes. It was only in 2021, the concept of meme negotiation he appeared.
In that sense, here are three common mistakes that regular investors make when trading meme stocks.
Chasing the wrong meme trade recovery
Investors who saw stocks rally quickly scrambled to get into the movement quickly. In the process, they were able to buy the shares at higher prices. Now they will either be waiting for another peak or they will have to record losses. This is a common mistake among beginning investors as well. When they see a rise in the stock price, they are afraid of losing and end up chasing the rally and buying the stock at a higher price.
Now, this strategy works for stocks that are in a long-term uptrend and have fundamentals to drive growth. But a meme swap rally is short-lived, as the price is inflated only to account for short-term profits.
Traders should exercise restraint and try to get a better entry during a correction rather than chasing an artificial rally.
Not recording profits on the rally
Most retail investors are still holding the BlackBerry after its share price turned parabolic. This is why the stock is still hovering around $17 after hitting $24. Investors who want big gains should post some profits after this rise in price. But, unfortunately, regular investors keep their earnings for a long time, waiting for another rise in the stock price. And that’s usually your downfall.
In normal stock trading, holding the stock pays off through passive investment. While you can keep the BlackBerry for its future growth potential, you should make some profit if you’re sitting on big gains. An $18 price tag is something that will take years to materialize, going down the fundamental path. Some investors become greedy and try to get exaggerated premiums instead of recording profits quickly.
If you can’t convince yourself to sell all the shares, divide your holdings into two or three tranches and set a different selling price. For example, you can sell 25% of your stake for $18, 25% for $17, 25% for $16 and keep the remaining 25%. That way you won’t miss the meme swap rally.
Betting more than they can lose on meme stocks
When betting on meme stocks, regular investors often allocate much of their portfolio in a single trade. This can be very dangerous, especially when investing in high volatility stocks. A sudden price drop can destroy entire portfolios in a matter of seconds. Therefore, those who wish to bet on meme stocks and a likely “gamma squeeze” should exercise restraint and only bet what they can lose.
Trading meme stocks can generate multiple profits, but it can also destroy your capital. If you’re looking to bet, follow the three principles above and walk away with small losses if you bought near the peak. It would be wise to invest your capital elsewhere if you want to build long-term wealth.
Check out this list of growth stocks for long-term returns.
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foolish contributor Puja Tayal it has no position in any of the actions mentioned. The Motley Fool recommends BlackBerry and BlackBerry.